BP) was using its initials in a "Beyond Petroleum" marketing campaign that played up its push into renewable energy. Now, in addition to the disaster in the Gulf, the company and its competitors are suffering from a decline in oil prices and difficulty in the alternative energy space, where European budget problems have hurt the heavily subsidized sector. UNG) and U.S. 12 Month Natural Gas ( UNL). I advise investors not to invest in these ETFs, since they track futures prices and suffer from contango, but UNL is superior to UNG if that's the route you want to take. The natural gas explorers and producers are also moving higher, with FCG showing a small gain in the past month, versus losses for a whole host of oil ETFs such as iShares Dow Jones U.S. Energy ( IYE). One fund doing better than the oil group of ETFs, but behind FCG, is the natural gas heavy iShares Dow Jones U.S. Oil & Gas Exploration & Production ( IEO). Individual investors aren't the only ones bidding up natural gas assets. Royal Dutch Shell ( RD) spent $4.7 billion at the end of May to purchase a private Pennsylvania firm with shale gas properties. One of the investors in that firm was KKR, and it's rolling over its profits into another shale gas play in southern Texas. Producers are stepping up production as well, with Baker Hughes ( BHI) reporting an increase in the rig count. In addition to the improvement in natural gas prices and the value of assets in the sector, the political climate may also improve. Natural gas has a number of features that make it favorable as a political issue. For environmentalists, it emits less carbon than oil and coal, and after the BP disaster, it's a plus that gas is mainly obtained via land drilling. There's some concern about potential ground water contamination from the fracking techniques used in shale gas drilling, but oil and coal extraction are not without their own problems.
For the national security and trade balance crowd, the vast majority of natural gas supplies are produced domestically. In most cases, replacing oil with natural gas (or coal) means replacing a foreign source of energy with a domestic source. Also working in favor of natural gas is the fact that, at least for now, natural gas is cheaper than oil. The ratio of oil to natural gas prices was about 11 in 2008 before the financial crisis, but climbed to 24 last year as oil prices rallied and gas prices tumbled, before working its way down from that extreme. With oil prices down in the past month and natural gas prices up, the ratio has moved to 15.5, still on the high side. Investors are always looking for the next big thing and that often leads them to alternative energy stocks and ETFs such as Claymore/MAC Global Solar Energy ( TAN). Solar and other alternative technologies have great promise, but the reality is that they're still not fully competitive. Meanwhile, natural gas can be deployed in the next few years to meet America's energy needs. Investors looking to profit from a broader move beyond petroleum should first look to natural gas. -- Written by Don Dion in Williamstown, Mass.
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